INVESTMENTS IN CONSUMER LOANS

New Residential, through limited liability companies (together, the “Consumer Loan Companies”), has a co-investment in a portfolio of consumer loans. The portfolio includes personal unsecured loans and personal homeowner loans. OneMain is the servicer of the loans and provides all servicing and advancing functions for the portfolio. As of December 31, 2018, New Residential owns 53.5% of the limited liability company interests in, and consolidates, the Consumer Loan Companies.

New Residential also purchased consumer loans from a third party (“Consumer Loan Seller”). These loans are not held in the Consumer Loan Companies and have been designated as performing consumer loans, held-for-investment. In addition, see “Equity Method Investees” below.

The following table summarizes the investment in consumer loans, held-for-investment held by New Residential:



	Unpaid Principal Balance		Interest in Consumer Loans		Carrying Value		Weighted Average Coupon		Weighted Average Expected Life (Years)^(A)	Weighted Average Delinquency^(B)
December 31, 2018
Consumer Loan Companies
Performing Loans	$	815,341	53.5	%	$	856,563	18.8	%	3.6	5.4	%
Purchased Credit Deteriorated Loans^(C)	221,910		53.5	%	182,917		16.0	%	3.4	11.6	%
Other - Performing Loans	35,326		100.0	%	32,722		14.2	%	0.8	5.6	%
Total Consumer Loans, held-for-investment	$	1,072,577			$	1,072,202	18.1	%	3.5	6.7	%
December 31, 2017
Consumer Loan Companies
Performing Loans	$	1,005,570	53.5	%	$	1,052,561	18.7	%	3.7	6.0	%
Purchased Credit Deteriorated Loans^(C)	282,540		53.5	%	236,449		16.2	%	3.3	12.5	%
Other - Performing Loans	89,682		100.0	%	85,253		14.1	%	1.0	4.5	%
Total Consumer Loans, held-for-investment	$	1,377,792			$	1,374,263	17.9	%	3.5	7.3	%


(A)	Represents the weighted average expected timing of the receipt of expected cash flows for this investment.


(B)	Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.


(C)	Includes loans with evidence of credit deterioration since origination where it is probable that New Residential will not collect all contractually required principal and interest payments, which are accounted for as PCD loans.

See Note 11 regarding the financing of consumer loans.

Performing Loans

The following table provides past due information regarding New Residential’s performing consumer loans, held-for-investment, which is an important indicator of credit quality and the establishment of the allowance for loan losses:



December 31, 2018
Days Past Due	Delinquency Status^(A)
Current	94.7	%
30-59	2.0	%
60-89	1.3	%
90-119^(B)	0.8	%
120+^{(B) (C)}	1.2	%
	100.0	%


(A)	Represents the percentage of the total unpaid principal balance that corresponds to loans that are in each delinquency status.


(B)	Includes loans more than 90 days past due and still accruing interest.


(C)	Interest is accrued up to the date of charge-off at 180 days past due.

Activities related to the carrying value of performing consumer loans, held-for-investment were as follows:



	Performing Loans
Balance at December 31, 2016	$	1,482,954
Purchases	—
Additional fundings^(A)	56,321
Proceeds from repayments	(329,843		)
Accretion of loan discount and premium amortization, net	4,891
Gross charge-offs	(73,842		)
Additions to the allowance for loan losses, net	(2,667		)
Balance at December 31, 2017	$	1,137,814
Purchases
Additional fundings^(A)	63,971
Proceeds from repayments	(257,182		)
Accretion of loan discount and premium amortization, net	1,940
Gross charge-offs	(56,870		)
Additions to the allowance for loan losses, net	(388		)
Balance at December 31, 2018	$	889,285


(A)	Represents draws on consumer loans with revolving privileges.

Activities related to the allowance for loan losses on performing consumer loans, held-for-investment were as follows:



	Collectively Evaluated^(A)			Individually Impaired^(B)		Total
Balance at December 31, 2016	$	2,441		$	997	$	3,438
Provision for loan losses	65,059			679		65,738
Net charge-offs^(C)	(63,071		)	—		(63,071		)
Balance at December 31, 2017	$	4,429		$	1,676	$	6,105
Provision (reversal) for loan losses	47,839			388		48,227
Net charge-offs^(C)	(49,664		)	—		(49,664		)
Balance at December 31, 2018	$	2,604		$	2,064	$	4,668


(A)	Represents smaller-balance homogeneous loans that are not individually considered impaired and are evaluated based on an analysis of collective borrower performance, key terms of the loans and historical and anticipated trends in defaults and loss severities, and consideration of the unamortized acquisition discount.


(B)	Represents consumer loan modifications considered to be troubled debt restructurings (“TDRs”) as they provide concessions to borrowers, primarily in the form of interest rate reductions, who are experiencing financial difficulty. As of December 31, 2018, there are $14.2 million in UPB and $12.6 million in carrying value of consumer loans classified as TDRs.


(C)	Consumer loans, other than PCD loans, are charged off when available information confirms that loans are uncollectible, which is generally when they become 180 days past due. Charge-offs are presented net of $9.0 million and $10.8 million in recoveries of previously charged-off UPB in 2018 and 2017, respectively.

Purchased Credit Deteriorated Loans

A portion of the consumer loans are considered PCD loans. Activities related to the carrying value of PCD consumer loans, held-for-investment were as follows:



Balance at December 31, 2016	$	316,532
(Allowance) reversal for loan losses^(A)	3,013
Proceeds from repayments	(123,932		)
Accretion of loan discount and other amortization	40,836
Balance at December 31, 2017	$	236,449
(Allowance) reversal for loan losses^(A)	(31		)
Proceeds from repayments	(90,700		)
Accretion of loan discount and other amortization	37,199
Balance at December 31, 2018	$	182,917


(A)	An allowance represents the present value of cash flows expected at acquisition that are no longer expected to be collected. A reversal results from an increase to expected cash flows that reverses a prior allowance.

The following is the unpaid principal balance and carrying value for consumer loans, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments:



	Unpaid Principal Balance		Carrying Value
December 31, 2018	$	221,910	$	182,917
December 31, 2017	282,540		236,449

The following is a summary of the changes in accretable yield for these loans:



Balance at December 31, 2016	$	167,928
Accretion	(40,836		)
Reclassifications from (to) non-accretable difference^(A)	5,199
Balance at December 31, 2017	$	132,291
Accretion	(37,199		)
Reclassifications from (to) non-accretable difference^(A)	31,426
Balance at December 31, 2018	$	126,518


(A)	Represents a probable and significant increase in cash flows previously expected to be uncollectible.

Noncontrolling Interests

Others’ interests in the equity of the Consumer Loan Companies is computed as follows:



	December 31,
	2018			2017
Total Consumer Loan Companies equity	$	66,105		$	74,071
Others’ ownership interest	46.5		%	46.5		%
Others’ interests in equity of consolidated subsidiary	$	30,561		$	34,466

Others’ interests in the Consumer Loan Companies’ net income (loss) is computed as follows:



	Year Ended December 31,
	2018			2017
Net Consumer Loan Companies income (loss)	$	79,539		$	98,692
Others’ ownership interest as a percent of total	46.5		%	46.5		%
Others’ interest in net income (loss) of consolidated subsidiaries	$	36,987		$	45,892

Variable Interest Entities

The Consumer Loan Companies consolidate certain entities that issued securitized debt collateralized by the consumer loans (the “Consumer Loan SPVs”). New Residential determined that the Consumer Loan SPVs should be evaluated for consolidation under the VIE model rather than the voting interest entity model as the equity holders, individually and as a group, lack the characteristics of a controlling financial interest. Under the VIE model, New Residential’s consolidated subsidiaries, the Consumer Loan Companies (Note 9), have both 1) the power to direct the most significant activities of the Consumer Loan SPVs and 2) significant variable interests in each of the Consumer Loan SPVs, through their control of the related optional redemption feature and their ownership of certain notes issued by the Consumer Loan SPVs and, therefore, meet the primary beneficiary criterion and consolidate the Consumer Loan SPVs.



	As of December 31,
	2018		2017
Assets
Consumer loans, held-for-investment	$	1,039,480	$	1,289,010
Restricted cash	10,186		11,563
Accrued interest receivable	15,627		19,360
Total assets^(A)	$	1,065,293	$	1,319,933
Liabilities
Notes and bonds payable^(B)	$	1,030,096	$	1,284,436
Accounts payable and accrued expenses	3,814		4,007
Total liabilities^(A)	$	1,033,910	$	1,288,443


(A)	The creditors of the Consumer Loan SPVs do not have recourse to the general credit of New Residential, and the assets of the Consumer Loan SPVs are not directly available to satisfy New Residential’s obligations.


(B)	Includes $121.0 million face amount of bonds retained by New Residential issued by these VIEs.

Equity Method Investees

In February 2017, New Residential completed a co-investment, through a newly formed entity, PF LoanCo Funding LLC (“LoanCo”), to purchase up to $5.0 billion worth of newly originated consumer loans from Consumer Loan Seller over a two year term. New Residential, along with three co-investors, each acquired 25% membership interests in LoanCo. New Residential accounts for its investment in LoanCo pursuant to the equity method of accounting because it can exercise significant influence over LoanCo but the requirements for consolidation are not met. New Residential’s investment in LoanCo is recorded as Investment in Consumer Loans, Equity Method Investees. LoanCo has elected to account for its investments in consumer loans at fair value. New Residential does not receive information from LoanCo Funding LLC in sufficient time to record its equity method ownership at the end of each month. Accordingly, New Residential records the activity on a one month lag, and reviews the current month’s information when it becomes available to determine if an adjustment needs to be recorded. To date, this one month lag has not caused a material impact to the quarterly financial statement closing process.

In addition, New Residential and the LoanCo co-investors agreed to purchase warrants to purchase up to 177.7 million shares of Series F convertible preferred stock in the Consumer Loan Seller’s parent company (“ParentCo”), which were valued at approximately $75.0 million in the aggregate as of February 2017, through a newly formed entity, PF WarrantCo Holdings, LP (“WarrantCo”). New Residential acquired a 23.57% interest in WarrantCo, the remaining interest being acquired by three co-investors. WarrantCo has agreed to purchase a pro rata portion of the warrants each time LoanCo closes on a portion of its consumer loan purchase agreement from Consumer Loan Seller. The holder of the warrants has the option to purchase an equivalent number of shares of Series F convertible preferred stock in ParentCo at a price of $0.01 per share. WarrantCo is vested in the warrants to purchase an aggregate of 117.8 million Series F convertible preferred stock in ParentCo as of November 30, 2018, and New Residential and LoanCo co-investors are vested in the warrants to purchase an aggregate of 30.0 million Series F convertible preferred stock in ParentCo as of November 30, 2018. The Series F convertible preferred stock holders have the right to convert such preferred stock to common stock at any time, are entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted, and will have liquidation rights in the event of liquidation. New Residential accounts for its investment in WarrantCo pursuant to the equity method of accounting because it can exercise significant influence over WarrantCo but the requirements for consolidation are not met. New Residential’s investment in WarrantCo is recorded as Investment in Consumer Loans, Equity Method Investees. WarrantCo has elected to account for its investments in warrants at fair value. New Residential has elected to record WarrantCo’s activity on a one month lag and to date this one month lag has not caused a material impact to New Residential’s consolidated financial statements.

The following tables summarize the investment in LoanCo and WarrantCo held by New Residential:



	December 31, 2018^(A)			December 31, 2017
Consumer loans, at fair value	$	231,560		$	178,422
Warrants, at fair value	103,067			80,746
Other assets	25,971			46,342
Warehouse financing	(182,065		)	(117,944		)
Other liabilities	(1,142		)	(13,059		)
Equity	$	177,391		$	174,507
Undistributed retained earnings	$	—		$	—
New Residential’s investment	$	42,875		$	42,473
New Residential’s ownership	24.2		%	24.3		%



	Year Ended
	December 31, 2018^(A)
Interest income	$	42,920
Interest expense	(12,258		)
Change in fair value of consumer loans and warrants	17,491
Gain on sale of consumer loans^(B)	2,697
Other expenses	(7,257		)
Net income	$	43,593
New Residential’s equity in net income	$	10,803
New Residential’s ownership	24.8		%


(A)	Data as of, and for the periods ended, November 30, 2018, as a result of the one month reporting lag.


(B)	During the year ended December 31, 2018, LoanCo sold, through securitizations which were treated as sales for accounting purposes, $1.2 billion in UPB of consumer loans. LoanCo retained $103.0 million of residual interests in the securitizations and distributed them to the LoanCo co-investors, including New Residential.

The following is a summary of LoanCo’s consumer loan investments:



	Unpaid Principal Balance		Interest in Consumer Loans		Carrying Value		Weighted Average Coupon		Weighted Average Expected Life (Years)^(A)	Weighted Average Delinquency^(B)
December 31, 2018^(C)	$	231,560	25.0	%	$	231,560	14.2	%	1.3	0.4	%


(A)	Represents the weighted average expected timing of the receipt of expected cash flows for this investment.


(B)	Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.


(C)	Data as of November 30, 2018 as a result of the one month reporting lag.

New Residential’s investment in LoanCo and WarrantCo changed as follows:



Balance at December 31, 2017	$	51,412
Contributions to equity method investees	308,050
Distributions of earnings from equity method investees	(6,176		)
Distributions of capital from equity method investees	(325,795		)
Earnings from investments in consumer loans, equity method investees	10,803
Balance at December 31, 2018	$	38,294